It is official Apple is one weak stock right now. It is supposed to be a tell when the market is up, and your down considerably to the tune of 3%. The Jim Cramer tax selling notion can now be dispelled as well. This is the new year, and for Apple shareholders the misery of the third quarter is repeating itself.

After a bump up with the entire market at the beginning of the year, a 300 point rally can lift a lot of boats; the sellers loved that entry point to reassert this stock on the downtrend it has been on since the 700 dollar level.

So what is really going on in Apple? What are the reasons for this Wall Street darling losing favor to such a degree? Where is this stock ultimately heading in regards to a price target? These are some of the things that I am seeing with the fundamentals of the Apple business model.

Apple doesn`t make the best phone anymore

Apple doesn`t unquestionably make the best smartphone anymore. The Galaxy3 by Samsung is at worst case on equal footing with regard to the Apple I-Phone 5 smartphone, and depending upon what features you covet in a smartphone, the Galaxy3 is even better for watching Netflix movies or playing games with its much bigger screen.

Timing really hurt Apple because the Galaxy3 came out 8 weeks earlier, and all those subscribers who could have looked at the I-Phone 5, went into their local Verizon or AT&T store and fell in love with the beautiful Samsung Galaxy3.

The Galaxy3 made all other phones, including all the latest offerings from the other brands look old and antiquated. It really stood out aesthetically by comparison. Yes it had the Apple ahh factor!

And once those subscribers bought the high end phone, they are locked up for at least 2 years with their new contract, and Samsung sold a lot of Galaxy3 smartphones, in fact they had a blowout quarter.

Rate of change

Another point to bring up is the rate of change, or how fast all of apple`s competitors have closed the gap, and in Samsung`s case have surpassed Apple in some aspects of the modern smartphone with better technology and features. Apple revolutionized the Smartphone with their first iteration, but if you have an old I-Phone it looks like something 20 years old, it is a dinosaur.

Apple went from being an unquestioned leader to just one of the best in less than 5 years' time. If we extrapolate this pace going forward Apple will not even be among the top 5 smartphones on the market in three years' time.

Everyone knew that in the end Apple made a commodity which was easily duplicated, and it's not like they didn`t borrow tons of features from other device makers who created much of the technology previous to Apple getting into the market.

So if Apple can go from not even being in the market to the best phone on the market in two years, the barrier to entry is pretty low, i.e., there is very little first mover advantage in this market judged by how fast the technology is reinventing itself. In other words, today`s leader can be tomorrow`s also ran faster than Moore`s law can bat an eye.

When a market is this lucrative, and this much cap ex goes into research and engineering by competitors with a relatively low barrier to entry, no creative team can rest on their laurels.

Law of diminishing returns

In the end though Apple is running into another law, the law of diminishing returns. There is actually very little that distinguishes any of the smartphones anymore, they essentially all have the same specs, capabilities, and their styles are even merging.

In fact, have you seen the latest Blackberry offering, it even looks like a cool phone. My first thought when I saw the Blackberry10 was wow that looks like an I-phone. So the category has matured, all the low hanging fruit features wise has been picked, and the phones are basically being commoditized as we speak.

Moreover, an older Android phone that people can get for free from their carrier is so much better than even the third iteration of the I-Phone by Apple. If you put these two offerings side by side, the I-Phone 3 looks old and antiquated, that`s how fast the rate of change has occurred in the industry.

So any differences between phones will become less and less as they all converge onto the best features, almost like evolution and how certain characteristics are selected for in nature, and all the birds on a certain island have the same bright colored feathers because it originally provided a reproductive advantage over the competitors.

Even Apple borrows from Samsung, and started making their screen larger. In other words, all the best features get selected, and converge into one standardized, commoditized product. And given the price point, one brand cannot ultimately distinguish itself to any degree like high end automobiles, i.e., Porsche can differentiate itself from BMW, and Ferrari can distinguish itself from Porsche or Aston Martin.

The smartphone has converged and become commoditized, and is only going to continue to be commoditized, and the real story here is that this equates with lower and lower margins as prices always come down during this phase.

I think that`s why Apple all the sudden started selling their phones at Wal-Mart and distributors were discounting the items because Apple overestimated the demand for their product, and they had a lot of supply to unload on the market. Therefore, Apple`s margins per phone are definitely going down.

Plus I think Apple realizes they cannot just put out one new phone a year while Samsung is putting out 5 and expect to continue to remain relevant in the industry. So they are probably trying to produce more new phones per year, and that means lower margins as well.

They are trying to cut margins and hope to make up for it with an increase in overall market share. But unfortunately, stocks get punished on Wall Street for bringing down margins. And usually this is just the start of a long margin contraction process, i.e., Dell and Intel.

Overvalued Market Cap

Apple was way overvalued when their market cap was more than 3 very large fortune20 companies, that should have been a huge red flag to investors to get the heck out of this stock. The numbers just don`t add up for what is essentially a glorified hardware provider.

I know Apple markets themselves as more than this, but that is all marketing hype! They may be a creative and stylistic device maker but in the end they are in an industry which is one exemplified by compressing margins and prices.

In other words, the technology industry is a genre where prices and margins historically compress once new technology is introduced and becomes adopted by the masses unlike education or healthcare where prices continue to escalate higher.

Product cannibalization

Apple`s products cannibalize themselves, nobody needs to buy an IPOD for digital music when a free smartphone can carry all of your music that you will ever need whether at the gym, or waiting at the Doctor`s office. No real need to have another duplicative device.

Tablets eat into Apple`s Laptop and mac sales, and the problem with that is one category will suffer but Apple still has the sunk costs of two product creation cycles, so in the end both product lines never maximize profits for the company. They end up with more overall sales, but much higher development and manufacturing costs that eat into overall company margins.

Is Apple toilet next?

And finally, I know Apple diehards are pinning their hopes on Apple inventing a new category like Apple TV, but Apple is running out of areas to create an entire new product genre that revolutionizes the way society utilizes a given device.

And their stock priced in this element during the 5-plus year run-up in the stock, and that is one hefty "deflate cycle" yet to be fully priced into any valuation models, that Apple will no longer be able to invent a new product category that captivates the entire nation and has Steve Jobs on the cover of Time magazine for person of the year.

That has all been priced into Apple`s stock, that premium coming out of Apple Stock is one bearish component to be weighed by future investors looking for value in Apple.

The farther Apple stretches outside their core competency, the more likelihood for a complete mishap, and they end up creating a blowup "engineering failure" product, that actually loses money for the company.

Crowded trade

The crowded trade effect of Wall Street, remember five years ago when RIMM was a Wall Street darling, and a huge momentum stock by all the fund managers. Every fund manager had to have RIMM in their portfolio it was a given, and that stock split, kept going higher, and on and on.

Chart Source: Yahoo Finance

Each year there are 10 large stocks that most of the fund managers get into, and four or five that every fund manager must own, the momentum stocks for the year. And whether it is NFLX, or CROX, or MCP it is great when you're on the right side of the momentum play, but when the party ends, the rush to the exits takes forever, and is one nasty fall from grace.

The problem is that valuations become so distorted that Apple at $500 looks like a discount, appears to be on sale, a big value trap waiting for unsuspecting investors.

But mark my word, there may be earnings surprises, and good quarters along the ride, but every jump in the stock will be sold into heavily, and the stock will continue to put in lower highs and lower lows as margins compress, and investors look for better opportunities in other areas.

Eventually $400 appears in sight, then $300, $200, $100 and my target of about $50 a share as the company reaches the Microsoft, Dell, Hewlett-Packard, and Intel phase of a maturing Tech Company. Apple better have a hefty dividend by then or $50 will not be the bottom for this aging dinosaur.

The end of cheap money

And finally, there has been a lot of cheap money on Wall Street for the last three years that played a large part in Apple`s lofty share price, well the era of cheap money is coming to an end over the next three years. This capital contraction means all asset classes that were supported by the fed will be receiving a haircut with regard to the previous golden era of effective zero percent borrowing costs.

But especially a momentum play where investors could borrow money cheaply, invest in a stock that was on a right trending graph where stops were easily moved up to lock in profits, and reduce risks considerably, all this will change in the next era of the tightening cycle.

All stocks will get hit to some degree, but the high flyers with amazing exponential stock runs like Apple will get crushed more severely on the downside of this change in monetary policy. This is why my target of $50 is probably much lower than most investors can possibly imagine right now, and almost laughable from today`s perspective.

But I am trying to be ahead of the curve, not in the past or present, but what trends, and market dynamics are going to play out over the next three years of an investing cycle as many investors are investing for much longer term than just on a yearly basis.

The tech graveyard

So be careful when it comes to buying Apple stock hoping for a value play. Sure Apple can be the exception to the rule, they can even reinvent themselves like IBM, but if we use the last decade as our guide most of the technology high flyers come back to earth in a very humbling way.

In fact, Apple, themselves has already exhibited this cycle once in their history during the early stages of their development.

The percentages are definitely against them beating the odds and becoming a perpetual high flyer, the more likely scenario is one of a mature tech company that offers quality products to loyal consumers, and pays investors a healthy dividend to justify the lack of future growth opportunities, and declining margins.

The tech graveyard is replete with examples of former tech darlings that now reside in this category. And this may be an overly optimistic endgame for Apple; there are much worse scenarios once the slide starts feeding on itself.

Sony was once thought to take over the world, and be unstoppable. Things change fast in the technology world.

These authors are dying for attention. I believe this guy has a mental problem that makes him try to create controversy. But you have to be at last 10% believable to have a drop of credibility. He's a flake and I'm sure is dismissed as one!

In part I agree with your reasoning , but $50 in 2016? Seems too far fetched in my opinion. The tech sector has shown a lot of boom-bust cycles but AAPL has a lot of cash and valid products that still are top sellers in their markets. Maybe Apple has been a overhyped stock and its fair value is around $400 , but $50 seems unlikely in my opinion, at least not by 2016.

Your conclusion is dumb. RIM the company after loosing so much money and market share still trades for more than $10 (Almost close to 10% value from it's peak share price)For you to suggest apple with go to $50 (Less than 10% value from peak) is really dumb. (pardon me for words)

Eventually it could go to $50 or below if they stop being the innovating Apple company. But if they keep innovating, and showing the world these paradigm shifts, why can't the stock go higher? or much higher?

Though unlikely, it is certainly not beyond the realm of possibility. As recently as 2008, AAPL was earning less than $ 5B per annum. Should they fall back to that level, a p/e of 10x would get you there.

Since the market tends to undervalue earnings in a negative trend, you could live to see a p/e of 4-7 on that. Also, a large cash balance can and will be ignored by the market.... look at RIMM.

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